CFTC Closes `Enron Loophole' for Seven Natural Gas Contracts on ICE

By Asjylyn Loder -
Apr 27, 2010

Seven natural gas contracts traded
on Intercontinental Exchange Inc. will face new regulations
including limits on the number of contracts a single trader can
hold, the Commodity Futures Trading Commission decided today.

The commission voted unanimously at a hearing in Washington
to impose regulations on the seven ICE contracts. The board
considered regulation of 24 natural gas, electric and carbon
contracts on the Intercontinental Exchange Inc., the Natural Gas
Exchange Inc. and Chicago Climate Exchange Inc.

The commissioners closed for these products the so-called
Enron Loophole, which exempted certain electronically traded
contracts from regulation. It was named for Enron Corp., the
Houston energy company that lobbied to insert the provision in
the Commodity Futures Modernization Act of 2000. Enron declared
bankruptcy in 2001.

“Congress recognized the danger such a loophole posed to
the American public,” Commission Chairman Gary Gensler said in
a statement prepared for the hearing.

Congress gave the commission authority, through a provision
in the 2008 Farm Bill, to impose rules on some contracts if the
commission found they served a “significant price discovery
function.”

“Commodity investors are facing increased regulatory
efforts, and are really concerned that these regulations may
force liquidity out of these markets,” Teri Viswanath, director
of commodities research with Credit Suisse Securities USA in
Houston, said in a telephone interview.

The commission voted unanimously not to regulate the
remaining contracts on ICE and the Natural Gas Exchange, and the
carbon contract on the Chicago Climate Exchange.

The loophole was blamed for the collapse of Amaranth, a
hedge fund that folded after losing $6.6 billion on natural gas
bets in 2006, according to a U.S. Senate investigation. The fund
sidestepped limits on the New York Mercantile Exchange by buying
electronic look-alike contracts on ICE. Those bets allowed it to
amass risk outside the view of regulators, according to the
Senate investigation.

Imposing Limits

The natural gas contract on ICE that was used by Amaranth
was the first one targeted by the commission, and regulations
went into effect in February. That designation meant that ICE
had to impose limits on the number of contracts one trader can
hold similar to the restrictions on Nymex.

“This is a significant effort,” said Michael Greenberger,
former director of trading and markets at the commission. The
commission needs to use its existing authority to clamp down on
speculation even as it asks Congress to expand its reach to the
over-the-counter market, he said.

Natural Gas Exchange Inc. in Calgary, Canada’s leading
energy exchange, opposes regulation of five of its contracts,
according to a Nov. 5 letter sent to the commission.

The California Public Utilities Commission supports
regulation of contracts based on power prices in that state,
according to an Oct. 23 letter from the utility commission to
the CFTC.

California Power

Oversight of the contract linked to California power prices
“may discourage market manipulation that could impact
California’s energy prices,” the utility commission said in the
letter.

The Western Power Trading Forum, an organization that
promotes competition in the Western power markets, and the
Natural Gas Supply Association both wrote letters to the
commission opposing regulation of some of the contracts.

Gensler predicted last year that the CFTC would exert its
significant-price-discovery authority over the carbon financial
instruments traded on the Chicago Climate Exchange. In public
comments, the Intercontinental Exchange said the carbon
financial instrument is a “spot contract” with “no open
interest and settling the next day” that shouldn’t be brought
under CFTC authority.

The climate exchange is a voluntary program based on
pledges from companies such as Columbus, Ohio-based American
Electric Power Inc. and Dearborn, Michigan-based Ford Motor Co.,
to cut back their output of carbon dioxide and other greenhouse
gases that scientists have linked to global warming.

The program started in 2003 and its members have promised
to cut their emissions 6 percent by the end of this year.
Companies that cut their emissions by more than this amount can
sell carbon financial instruments they don’t need to firms that
fall short of the target. Carbon offsets, or pollution cuts from
sources like farms and landfills, can also be used to meet the
target.